1. A case for revenue-based investments
Balancing the interests of investors and entrepreneurs is an ongoing topic when
discussing ways to democratize finance.
There is tension between entrepreneurs who want to establish a profitable, long-term
business, and investors looking for dividends and capital gain resulting from a
successful ‘exit’.
Investors need a return on and of their investment. Businesses are forced to find
buyers, or pursue an IPO (Initial Public Offering) strategy compared to focussing on
revenue growth and profitability,
What’s needed is an instrument that’s part conventional equity investment and part
loan.
Revenue-based finance may be the solution.
What is revenue-based finance?
Basically, a company agrees to pay a percentage of its gross revenue, up to a
negotiated multiple of the original investment (the cap), in exchange for funding from
an investor or group of investors.

2. The logic being that a company should be generating revenue, or have a
demonstrable road to revenue to secure investment. There should be a simple
mechanism for calculating payments to investors.
This makes it easier to value the investment via conventional means vs trying to
determine and agree a capital value.
Revenue-based investment offers investors certain benefits:
 It guards against the risk that the business may be successful financially, but never
go public or purchased in a meaningful sale.
 Another benefit is that while the initial calculations are based on a target or average
revenue assumption, the investors benefit directly from any revenue that exceeds
this assumption, either by being repaid sooner than expected, or by receiving higher
returns in the case of uncapped agreements.
Many entrepreneurs’ goal is to establish a successful, independent business and yet
the current investment paradigm considers that a bad outcome. Many investment
funds consider that a business is not a success until you have a profitable ‘exit’.
This view produces a lot of aberrant incentives.
With revenue-based finance, a company that grows its revenue stream(s) will be
paying its investors more than their original investment.
Incentives need to be aligned so that investors and entrepreneurs are gunning for
the same thing; a successful, profitable business.

3. Revenue-based finance can open financing options for established cash flow
companies that will never become the next unicorn, and will provide income streams
for savers who are disadvantaged by ultralow yields on their savings.
Of course, there will be complete failures, but companies that find some degree of
success will also provide a return to their investors.
Revenue-based investment does not eliminate the risk that the investment is simply
bad, but in the middle ground between bankruptcy and an IPO, where millions of
small businesses reside, it should provide a return for investors.